Feasibility study

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Feasibility study

What is a feasibility study? What is it for? How to build a feasibility study? Why is it so important for the investor? Why is a feasibility study necessary for an existing business? And other important points…
In the process of interaction with the initiators of investment projects, start-up teams or representatives of an existing business, Alfa Resonance Capital requests a specific package of documentation in order to understand the essence of the project, the prospects for its implementation or understanding the economic viability of a particular business idea.
Often it turns out to be a rather strange collapse – a rather interesting and promising project that can bring real profit to the initiators and investors, they simply do not notice and do not realize it, investment structures ignore it and do not go into the process of cooperation with the authors of the project. What is a stupor between the initiator of the project and the investor? Romanticism of attitude to one’s own idea, excessive reverie, lack of real practice, outdated views on business, the market and facts that are not supported by arguments and calculations, or something else? In fact, the answer is extremely trivial – the fault is the ineffective and short-sighted business planning. In order for the project to turn out to be truly justified and competent, it is necessary to develop a feasibility study for the project or a business idea.

So what is the feasibility study for the project? A feasibility study is a mathematical, actuarial and market analysis, assessment and calculation of the economic feasibility of a project, the creation of a new enterprise, the reconstruction and modernization of existing facilities, the construction or construction of a new technical facility. It is based on comparing the assessment of results and costs, determining the effectiveness of the application and the period for which the investment is paid back. This can be a third-party investment or a bank loan for a business.
Also, a feasibility study is necessary to confirm the feasibility of choosing a new production technology, processes, equipment. Most often it is suitable for existing enterprises.
Feasibility study required for each investor and potential partner of the company. During its development, a sequence of work is carried out to analyze and study all the components of the investment project and calculate the timing of the return on investment. A feasibility study is the foundation of any business plan; without it, there will be no business plan.
The feasibility study is always developed and justified on the basis of three possible scenarios of the development of events in the process of business operation. These are: optimistic scenario, realistic scenario, pessimistic scenario.
Initiators of investment projects often do not see the difference between a business plan and a feasibility study. The main difference between these documents is that in the feasibility study there is almost no description of the company and product, market analysis, risk analysis and marketing strategy – the most important aspect in the business plan. This document structure is related to the fact that a feasibility study is being calculated for projects introducing new processes, technologies and equipment to existing enterprises or as part of the creation of a new enterprise. The feasibility study provides information on the reasons for choosing certain solutions, processes and technologies, economic calculations of the effectiveness of their implementation. If you describe the difference between a business plan and a feasibility study in one sentence, it turns out: a business plan proves the viability of the project in a word, and a feasibility study – in a figure.

Why do you need a feasibility study? A correctly compiled economic and mathematical calculation will allow you to see the effectiveness of investing money and your own efforts in developing new or finalizing the old types of activities of the company, the company needs a merger or acquisition, if there is a need for lending or investment. A feasibility study also helps to choose the right equipment, select and implement suitable production technologies, correctly organize the company’s activities, and effectively distribute opportunities in the process of implementing an investment project.
The package of documents that a bank requires to approve a loan necessarily includes a feasibility study. In this case, this document shows the profitability of providing a loan, an increase in the level of activity due to lending, and, of course, a guarantee that the loan will be returned to the bank.
Some entrepreneurs believe that a feasibility study is not needed for their business segment. Representatives of the construction business, advertising and marketing, business related to the rental, purchase and sale of real estate especially think so. This is not so! The feasibility study is used in absolutely all types of business activities. There were no examples or averaged templates, and never will be! Any feasibility study is unique, individual and calculated on the basis of a number of factors and initial data. The feasibility study is based on complex interconnected economic and mathematical formulas.
The development of a feasibility study is necessary in the following cases:
  • when a company needs a rationale for choosing new equipment;
  • when the company needs an explanation of the decision to modify the production technology;
  • when a company needs an understanding of the seasonality of sales;
  • when a company needs an understanding of the effectiveness of production processes;
  • when a company needs an understanding of the effectiveness of running its own business;
  • when a company needs an understanding of the effectiveness of the distribution and use of borrowed funds and so on.
To develop a feasibility study, a full-fledged working group of specialists is always used – lawyers, financiers, economists, etc. One individual entrepreneur is not able to prepare a competent feasibility study!

The structure of the main sections of the feasibility study. There can be many variations. However, if we are talking about a serious approach to the preparation of this document (which we can safely call the circulatory system of any business or project), then, nevertheless, it is necessary to adhere to the norms and principles of UNIDO. So:
  1. The title page. The content and name of the project. Information about the business owner. For example:
  1. Macroeconomic environment. For example:
  1. Production and sales, construction and sales, etc. For example:
  1. The staff and staffing. For example:
  1. Costs (all kinds). For example:
  1. Working capital. For example:
  1. Intangible assets and fixed assets. For example:
  1. Investment schedule. For example:
  1. Sources of financing and investment performance calculations. For example:
  1. Report on the financial condition of the company. For example:
  1. Profit and loss statement. For example:
  1. Cash flow statement. For example:
  1. Project analysis. For example:
  1. Forecasting Statement of Financial Position. For example:
Etc. Almost every section of the feasibility study is accompanied by corresponding graphs and charts. It’s not possible to understand the effectiveness of the project, the intentions of the initiators and the effectiveness of the business without a feasibility study!

For advice: office@arcgroupltd.eu




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